Monday, July 13, 2009

WorldMarketsGuide Monday Preview: Clues from Global Markets

High Anxiety: Markets Flat or Down Ahead of U.S. Q2 Earnings

(As of approximately 11:00 GMT Monday, 7:00 am EST)

Summary: Uncertainty As Markets Await US Q2 earnings.

Global markets mostly flat or down on Friday, Asia closes down hard on Monday, with Europe opening mixed, reflecting low risk appetite ahead of the first big US earnings reporting week for Q2, as a pack of leading companies, and banks both report on Q2 results and give guidance going forward

Introduction: The Theme Is Uncertainty & Fear

To paraphrase the first lines of the first of the Lord of the Rings films, The Fellowship of the Ring, "The world has changed (over the past 3 weeks). You can almost feel it in the charts, in the news, in the air."

First, there was June's fading optimism about the March Rally in stocks, commodities, and riskier currency pairs, as was reflected in June's mostly flat trading range. This ambivalence was supported by mixed economic news that suggested the gains in these markets were far ahead of actual growth prospects in jobs, GDP, earnings, or any other meaningful metric for the coming year.

Next, in late June, The World Bank revised global growth forecasts downward, and markets tanked. The OECD differed slightly, saying that US growth would be strong enough to outweigh continuing decline elsewhere. The views balanced each other, markets began to recover.

Then came the very disappointing monthly US non farms payroll data, which undermined the OECD report. It showed job losses accelerating and suggested that recovery would be later and weaker in the US than previously thought, thus undermining the OECD. With the stake thus driven into the market's heart, it fell back, as if into a coffin. Last week, the IMF announced it too was revising its quarterly world growth forecasts down thus nailing the lid shut on near term recovery hopes.

With a surge of major second quarter (Q2) earnings reports this week, we ask, "will these bones rise up?" Will there be enough positive surprises to relieve the fear, or re-ignite the rally?

Stock Indexes

Stocks finish mostly down Friday, continue down Monday as the major Asian markets drop hard, Europe flat.

Because most major indexes have formed a declining trading channel over the past 2 weeks, longer term traders might want to draw that channel and attempt to enter positions near support or resistance.

Shorter term traders may want to use the horizontal, flat trading ranges established since Wednesday for choosing support or resistance levels to enter positions.

For those who use chart patters as an indicator, note how the S&P appears to have broken the "neckline" of this bearish Head and Shoulders pattern, suggesting further downside. The very pronounced flat top around 940 is also not encouraging, and may be viewed by some as a variation on a bearish double top. However, as noted repeatedly before, positive surprises from the financial sector earnings announcements could well give the market its next boost.

S&P 1 Day Chart as of July 13

A partial list of firms reporting this week includes CSX Corp. (July 13th) , Goldman Sachs (July 14th), Johnson & Johnson (14th), Intel (14th), YUM! Brands(14th), JPMorgan Chase (16th), Google (July 16), IBM (IBM), Bank of America (17th), Citigroup(17th) and General Electric(17th).

Things may be clearer by Friday.


Most currencies have tracked stocks and have traded in tight horizontal ranges, reflecting the same uncertainty ahead of major Q2 earnings announcements.

There have been exceptions. For example the JPY continues to rise against everything, especially the higher yielding currencies as traders unwind carry trades in which they sold low yielding yen to buy higher yielding AUD or NZD. In the chart below, note how the AUD/JPY has established a downward trending channel for trend traders. Other JPY, USD or CHF pairs show similar down trends against higher yielding AUD and NZD for the same reason, unwinding of carry trades by those attempting to sell Yen and buy a higher yielding currency in order to collect the higher interest rate while paying a much lower one on the Yen, USD, or CHF.

AUD/JPY 1 Day Chart as of July 13


As risk assets, commodities have tracked the general movements of the stock markets too, some with more volatility, some with less. As noted before, crude generally has exaggerated the S&P 500's movements (we often see the S&P as the most representative example of general stock market index behavior. So have others, such as wheat.

For example, note the comparison below of 1 day charts of different instruments. Note how the chart for crude oil [upper right chart] exaggerates the moves on the S&P [lower left chart].

Comparison of Daily Stock Index Movements with Representative Commodity and Currency Markets

Conclusion: The Next Big Question

Will there be enough positive earnings surprises to steady or even lift the markets out of their recent downtrends? Despite all the negative news, don't be shocked if it happens.

As mentioned before, the March 3 rally was preceded by leaks of good news from the critical banking sector, and that if more were coming, we might expect more of the same. Indeed, the New York Times recently reported that Goldman Sacks will beat expectations. Enough news like that might well be just the tonic needed to at least stop the downward momentum, at least for now. Just don't look too closely at how they got those numbers.

Certain things, like sausages, are best enjoyed if you don't know how they're made.

Disclaimer: Opinions herein stated do not necessarily reflect those of AVAFX, and the author may have positions in the instruments mentioned.

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